The catalyst for change

WASTED EFFORT: Protesters on the Denniston Plateau after approval for Bathurst’s open-cast mine.

Do you want the good news or the bad news? One of the things investors look forward to, or dread, is the sudden announcement that changes everything. Analysts sometimes call it a catalyst.

We had a couple of examples on market in the last two weeks.

First there was trans-Tasman media company APN, which announced on February 19 it would acquire the other half of its jointly-owned radio businesses from erstwhile partner Clear Channel.

The deal put a rocket under APN's sagging share price, which rose from 45c to as high as 71c within days - a gain of about 58 per cent.

On the same day APN shares touched 71c, coal miner Bathurst Resources said it was laying off 29 people and deferring development of its new West Coast mine because coal prices were too low. The shares immediately sank from an already depressed 16c to just 10c, down 38 per cent.

Investors would obviously like to say they foresaw both these events and positioned themselves accordingly, but obviously some didn't and have to roll eyes and shuffle feet when the subject comes up.

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So how hard is it to spot these catalysts?

In the cases of APN and Bathurst, it would take more than a casual glance to know this stuff was coming, but it wasn't deeply hidden.

Taking the bad news first, Bathurst was already a disappointment before its "knuckles down to preserve value" announcement.

Incredibly, Bathurst once had market value of about $1 billion as investors piled with heady excitement into the chance of riches from high-grade coking coal, even though the resource was still in the ground.

In January 2011, Credit Suisse initiated analyst coverage with an "outperform" rating when Bathurst was already valued by the market at A$584 million, or A97c a share, based on expectations of low-cost, high-value production from its recently acquired Buller coal resource on the West Coast.

The Buller project would have much lower costs than other coal mines, said Credit Suisse, while coking coal commanded prices of US$225 a tonne or more, so Bathurst was likely to be twice as profitable as other coal miners.

While Bathurst needed resources consents to begin production, "significant value remains despite the recent run in the share price and we see potential for further share price appreciation to our A$1.50/share target price as BTU moves towards first production, possibly in [calendar year] 2011."

Cue hollow laughter.

Bathurst didn't get its resource consents until last October, and is yet to start production as it waits for approval of its operating plan.

As the consent process dragged on, the price of coking coal kept falling. In December the spot price was US$140 a tonne, a far cry from the US$300 a tonne back in 2011.

On January 31, Bathurst released a report on its operations and cashflow for the three months to December. It showed negative operating cashflow of $7.3m and a cash balance of $10.8m.

At that rate of cash burn, Bathurst would run out of money within six months.

A rapid start to profitable production from its flagship Escarpment mine would avert the crunch, but with Bathurst's initial production costs estimated at US$120 a tonne, it would have been apparent by then that the company faced a significant short-term problem if prices dipped further.

From a price of 21c on January 31, the shares slipped and slid to 15c before the layoffs were announced, so it looks like some saw it coming.

However, the big damage had already been done by the falling coal price. Small commodity companies like Bathurst are flotsam on the tide of world markets, and it will take a turn of the commodity cycle before it is back in favour.

APN, meanwhile, has been in the doldrums for more than a year as its business was pinned by the weight of falling income and heavy debts.

Something had to be done and shareholders made it clear they did not favour contributing more capital to ease the debt burden, forcing the resignation of the chairman, managing director and three other directors over the issue.

When their departure was announced in February last year, the APN share price was 33c.

New chief executive Michael Miller had some work to do, but one of his goals was to tidy up the company's messy asset portfolio. He told the Australian Financial Review last week: "This time last year, seven out of 10 [APN divisions] were not wholly owned," he said. Now, "it's a very different company".

Of those partially owned assets, the New Zealand and Australian radio businesses loomed large. Radio was growing, while media, digital and outdoor advertising were shrinking. However, joint owner Clear Channel was also in debt strife and a potential seller.

The opportunity for a transaction enhancing APN's position would have been apparent to APN watchers, but not when or how it would take place.

When Miller did the deal last month it was clear that shareholders saw the terms as attractive, and were happy to invest money to make it happen.

"We're no longer a company with a portfolio, we're going to integrate, we're going to be a media company and get the businesses not just to perform their best but work together," Miller said.

Personally, I doubt the scope to make big gains from integration, and what Miller may have really achieved is an easier group to split up. But the catalyst for change is there.

That's the good news.

Correction: In last week's column I wrongly said Australian bank shares didn't come with imputation credits. I should have said the shares have zero or minimal imputation credits.